Bonding & Staking — A Better Token Emission Strategy
TL;DR
Bonding addresses the liquidity loyalty issue in DeFi 1.0 by helping protocols acquire revenue-generating assets and empowering both protocols and users to withstand market volatility, which promotes protocols’ long term success.
Token emission mechanisms in DeFi 1.0
In crypto, a standard approach to distributing tokens is via liquidity mining. It refers to the reward mechanism that incentivizes LPs with protocols’ native tokens in exchange for liquidity. Generally, liquidity mining allows protocols to bootstrap substantial liquidity in a short timeframe, which facilitated some projects in the ecosystem to become top players in the past two years.
Liquidity mining is still mainstream among DeFi protocols for several reasons. First, cognitive bias played an essential role in spreading liquidity mining. Just like the definition of the anchoring effect, many protocols adopted this strategy by referencing the early achievers in the hope of duplicating their success at a lower risk. Besides, the strategy is straightforward in its deployment and the flow of operation, both of which made mining a solid choice for protocols. Leading projects in the ecosystem have designed functioning and practical protocols before the launch of their liquidity mining programs, which was attractive enough to users in the first place. Although, this token emission strategy is not viable in the long run.
Dive into the problem
As liquidity mining thrives, some innate flaws become evident, and liquidity loyalty should be the most agonising. Owing to the fact that liquidity mining is renting in essence, it may be more economical than purchasing liquidity at the beginning, but this rented liquidity will be withdrawn once incentives cease. In other words, liquidity mining is a perpetual expense with little lasting benefit due to misaligned goals between LPs and protocols. Since much of the liquidity in current mining projects comes from mercenary capital which has no loyalty to the protocol and instead pursues opportunities that are most profitable at that time, they inevitably shift from protocol to protocol.
Many protocols attempted to address the issue by tweaking the mechanism in rewards issuance. Some granted rewards based on deposit length, and one protocol tuned its liquidity mining program over the initial few weeks by adding several additional parameters aimed at rewarding specific types of liquidity. These innovations have brought practical insights and positive results into the ecosystem yet failed to uproot the underlying problem.
Bonding: A liquidity accrual solution
Bonding is a secondary value accrual strategy that allows users to utilize LP tokens to purchase tokens issued by protocols at a discounted price. It enables protocols to transfer their native tokens for assets. This innovation facilitates protocols to accumulate the vital infrastructural liquidity that is used in liquidity mining. Meaning that protocols no longer need to rent liquidity at exorbitant interest, they simply purchase it, turning an asset-draining expenditure into revenue-generating assets that address the issue of liquidity loyalty and facilitate a protocol’s long-term prosperity.
For protocols, bonding not only helps them to acquire POL and to cope with volatility but also brings about a stronger community.
Acquiring protocol-owned liquidity through bonding allows a protocol to withstand fluctuation in the market. No matter how bearish the market is, a protocol can always depend on its own liquidity to generate revenue. Meanwhile, community members can be more faithful to the protocol they support since the token’s value will not perish abruptly when incentives discontinue. These advancements addressed the problems mentioned above and can help build a healthier ecosystem for protocols and provide soil for young protocols to thrive.
For users, bonding and staking protect their investment with a better margin to withstand market volatility.
In a bullish market, users can profit more from bonding when chasing the hype. Meanwhile, since users sold their LP tokens for protocols’ native tokens via bonding, their tokens are free from the AMMs’ restraint and thus releasing users from impermanent loss. However, when in a bear market, users may still be able to profit via bonding. In the case of BunnyDucky bonding, users bought $100 worth of BUD at a 15% discount with $85 worth of LP tokens via bonding, and these BUDs are vested for 7 days after bonding to mitigate the selling pressure on the market. In the meantime, users can enjoy 2134.13% APY (auto-compounded). If the market brings 10% down on token price 7 days after bonding, users can still profit $5 from selling their BUDs at $90. Moreover, the high yield from staking can offset an even larger fall in token price. A well-informed user would recognize these merits and choose bonding over other methods, which, in turn, helps protocols to develop further.
To conclude
Given the popularity of liquidity mining, its limitation can not afford to be overlooked. Bonds addressed the problem and already attracted its advocates to emit tokens in a healthier mechanism, which in turn builds a sustainable ecosystem.
Penguin bonding is serving notable protocols and more are on the way. We welcome any interested parties to discuss with us for potential partnership and thrive together along our mutual course.
About Penguin Finance
Penguin is a Liquidity-as-a-Service Platform that offers a one-stop solution for treasury management such as swap, bonding, and staking. A protocol can utilize the bonding service to acquire liquidity instead of renting it. Protocol-owned liquidity can help a protocol survive in the long run by staying with it during a downturn. Instead of fostering short-term involvement, token vesting will allow protocols to match their incentives and communities with their long-term goals.
